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Income a constraint in realising all goals
The Navlurs have invested well for almost all their financial goals.However,their current income level means that they may not be able to achieve the most crucial onebuilding their own house. AMIT KUMAR With about 70% of their portfolio in equity,the Navlurs clearly understand the importance of compounding.This translates to good financial planning since it means they can achieve most of their goals.They have,of course,made the typical errors,such as buying expensive money-back policies and having inadequate health cover,but these can be easily taken care of.However,the familys current income level also means that they might have to miss out on one of the most important goals that every Indian cravesa house.As for the rest of the goals,heres how they can meet them. Rajeev Navlur,35,lives with his wife Smita,a 31-year-old homemaker,and their 1-year-old daughter Riya,in Mumbai.He brings in a monthly income of 43,500,and after accounting for household expenses,mutual fund SIPs,PPF and insurance premium,they are left with a surplus of 6,094.This cannot be considered a high amount by any stretch,especially since expenses on Riya will only increase with time.However,the Navlurs can still achieve all their goals with the help of their existing investments without any need for fresh inputs,except for the goal of building a retirement corpus. With a total of nearly 11 lakh in equity,the Navlurs have taken this asset class very seriously.My father has been investing in stocks for the past 40 years and I take his advice,but I am not very comfortable with direct investment, says Rajeev.The Navlurs have a total investment of 2.67 lakh in 19 stocks bought over the past four years.Pankaaj Maalde,head,financial planning,apnapaisa.com,suggests that the Navlurs sell these stocks.Direct equity investment requires an in-depth research and analysis and should be avoided unless the investors are extremely informed about the sectors.Instead,they should move the proceeds to mutual funds, says Maalde. Surprisingly,the Navlurs are more aware about their life insurance needs than most other families we have featured.They have two term plans of 25 lakh each,and two money-back policies from LIC and ICICI worth 5 lakh.This,along with their liquid investments of 16 lakh,gives the Navlurs a cover of 71 lakh,which is adequate.However,we suggest that they switch their term plans to the online mode to save on premium.Although the money-back policies are expensive (annual premium of 24,042 for a cover of 5 lakh) Maalde suggests that they continue with them as these can make for the debt component in their portfolio.Also,the Navlurs must get a term cover for Smita,since she is currently on a sabbatical to look after Riya and intends to go back to work once the child is older. However,unlike life insurance,health insurance has been neglected by the Navlurs.They have a family floater policy of 3 lakh from ICICI Lombard.Maalde suggests they move from floater to individual policies,including one for their daughter,for a cover of 3 lakh.They should also buy individual topup health insurance plans worth 5 lakh for all of them.This will cost them around 13,000 per annum.They should also buy a 25 lakh critical illness cover and disability cover of 25 lakh for Rajeev.This will cost them around 12,000.Although this raises the total expenditure on insurance,it is advisable to take this cover to protect the family against any medical emergency. Like most parents,the Navlurs want to save for their daughters education and marriage and have planned well to achieve both these goals.For building an education fund of 32 lakh for Riyas higher education after 15 years,the couple needs to make a lump-sum investment of 3.9 lakh today.This can be allocated from their existing mutual fund investment,which is expected to give returns of around 15% per annum.As for the corpus of 1.03 crore that they shall need for Riyas marriage after 25 years,they need to make a lump-sum investment of 3.15 lakh from their existing fund investment. Besides these goals,the Navlurs have other medium-term goals,which include going for a domestic vacation,which will require 1 lakh after three years and a foreign sojourn worth 3 lakh after six years.For this too,they need to allocate 6,500 of their SIPs and use the proceeds accordingly. The Navlurs wanted to build a corpus of 10 crore in another 25 years for their retirement,but not only is the number unachievable at their current income levels,but also three times that they shall need to sustain their current living standards.According to Maalde,a sum of 3.3 crore will be sufficient for them.To build this corpus,a part of the mutual fund investment,the PPF investment and both the money-back policies will be used.Maalde has advised the Navlurs to deposit 1 lakh every year in the PPF account and to continue paying the premium for both the policies.They must also allocate 4.5 lakh from the existing mutual fund and direct equity investment ( 1.8 lakh mutual fund + 2.67 lakh direct equity).This amount should be shifted to a balanced fund.This will help them accumulate around 1.93 crore at the time of retirement.For the shortfall of 1.40 crore,they are advised to allocate the existing SIP of 7,500 in a balanced fund,which is expected to grow by 12% per annum. However,in planning for all these goals,one important goal will have to be skipped by the Navlurs.They currently stay in Rajeevs parents house as his father works in a different city.Rajeev plans to buy a house worth 75 lakh in another three years,when it is likely to cost him about 1 crore.My father will pay about 80% of the cost,and I will have to pay the balance, says Rajeev.However,even the balance,20 lakh,seems out of reach for the Navlurs at their existing income level.After the recommended changes,the SIPs will decrease by 2,000 per month,while the PPF contribution and the insurance premium will increase by 6,334 and 1,500 respectively.This leaves them with a surplus of only 260,while they will need to pay at least 20,000 per month as EMI for a home loan of 20 lakh.As they are woefully short of this target,Maalde suggests that they put the the plan on a backburner for the time being.Later,when Smita begins to work,they can arrange for the EMI. The Navlurs also need to build a contingency fund of 1.26 lakh,which will be sufficient for their expenses for six months.This can be invested either in a liquid plus fund or a saving-linked FD account.This amount should not be used for any other purpose. The Navlurs have done well to invest for all their financial goals,and once Smita gets back to her job,they can try to save up for the currently unachievable goal of buying a house. RECOMMENDATIONS EXISTING EQUITY FUNDS Lumpsum: Birla SL Tax Relief,Canara Robeco Equity TaxSaver,Principal Personal Tax Saver,SBI Magnum Tax Gain,HDFC Tax Saver,DSPBR Liquidity,HDFC Growth. SIPs: HDFC Top 200,DSPBR Top 100 Equity,HDFC Equity,HDFC Prudence (SIPs). Advice: The portfolio is scattered and difficult to manage.The Navlurs must concentrate on a smaller portfolio of 4-5 strong funds,which can include Franklin India Bluechip,IDFC Premier Equity and ICICI Pru Discovery. SUGGESTED BALANCED FUNDS HDFC Prudence,Reliance Regular Saving (Balanced) and Birla Sun Life 95. Rationale: Considering Navlurs investment in equity funds,it is important that they also invest in balanced equity funds to bring more stability to their portfolio. NAVLURS GOOD MOVES ... Adequate life cover through term plans. Investing in mutual funds through SIPs and lump sum. Maintaining a healthy savings rate. AND THE BAD ONES Not buying adequate health insurance. No planning for retirement and other financial goals. Financial plan by Pankaaj Maalde ,Head Financial Planning, apnapaisa.com |
